Monday, October 5, 2009

On the Inequity of Handing Mortgage Servicers $27,065,760,000

The media seems curiously indifferent to the continued and deserved anger of the public regarding bank bailouts. Of course, the fundamental problem is that we were sold a bill of goods. The money was clearly going to fill existing black holes in financial firms’ balance sheets. That would have been a legitimate use of taxpayer dollars if incumbent management had been thrown out, bad assets were disposed of, and the industry was put on a short enough leash to prevent this sort of thing from happening again in the near future. Instead, citizens were given a bald-faced lie: that the funds would go to support new lending.

Now one can argue that too much lending was what got us into this mess in the first place, but that does not alter the basic conundrum: that the bailouts were badly misrepresented but the media for the most part seems unwilling to push too hard on this front. Yes, the papers carry the occasional “banks aren’t lending” story. But we haven’t seen much pushback on the deception underlying this entire operation.

One piece of this is the inability of cutting the Gordian knot of restrurcturing underwater mortgages. Before I get the usual howls from readers objecting to supposed deadbeats or greedy people getting an unfair break, I suggest you consider a few facts. First, no one seems to have a problem with Chapter 11 for companies, in which they get a stay from creditors and they work out a plan which includes writing down debts to a level that the company can support. We (and just as important, the lenders themselves) recognize that half a loaf is better than none.

In the stone ages before securitization became widespread, banks would do what we now call mortgage modifications with viable (stress viable) borrowers. If a homeowner still had a source of income, the bank recognized in most cases the losses would be lower if the homeowner could be kept in place than if the bank incurred the costs of foreclosure and bore the risks and uncertainty of disposing of the house.

As most readers know all too well, this pattern has been turned on its head. The complexities of the structuring of mortgage securities means that the trancheholders who will bear the brunt of losses in a foreclosure are in most cases are different than the ones that take the hit in a principal reduction (the only type of mortgage mod that has decent odds of succeeding). An even bigger barrier is that services profit from foreclosures and are set up to do them on a streamlined basis, while mods are best done one-on-one, and even attempts to standardize procedures still take a fair bit of individual attention.

Reader Barbara, a mortgage industry veteran, is disgusted by the fact that servicers who have refused to make mortgage mods are getting large government bribes inducements and are still doing perilous little. See pages 22 and 23 of this October 2 TARP update which shows the total dole to servicers.

McClatchy, which was the only major news organization to offer critical coverage of the Iraq war, seems to be the only one taking servicer misdeeds seriously. It has two stories by Chris Adams on servicer misdeeds. One discusses how some recipients of TARP funds, such as Select Portfolio Servicing (formerly Fairbanks Capital) and Countrywide have had run-ins with state officials about customer abuses.

The federal government is engaged in a massive mortgage modification program that’s on track to send billions in tax dollars to many of the very companies that judges or regulators have cited in recent years for abusive mortgage practices.

The firms, called mortgage servicers, have been cited for badgering, manipulating or lying to their customers; sticking them with bogus fees, or improperly foreclosing on them…

The reliance on such companies points to an ironic paradox for federal regulators: Cleaning up the nation’s financial crisis often rewards the firms that helped create the mess. …

To make matters worse, the Government Accountability Office, Congress’ watchdog, has said that the Treasury Department hasn’t done enough to oversee the companies participating in what’s known as the Home Affordable Modification Program…

Since it began this spring, only 12 percent of a potential 3 million delinquent mortgages have begun the process of being reworked, or put into “a trial modification,”…

Although it’s early in the Treasury Department’s program, housing advocates say the servicer industry for years has resisted helping customers with modifications….

It shouldn’t have been a surprise that the mortgage service companies would have trouble executing wide-scale mortgage modifications. They generally aren’t set up for the complicated business of reworking loans.

In 2007, an assistant attorney general in Iowa, Patrick Madigan, analyzed the looming mortgage meltdown and found that mortgage service companies have a “highly automated process, spending as little time as possible on an individual loan and preferably no time actually talking to the customer.”

“Loan modifications, by contrast, are a time-intensive process that requires a great deal of individualized attention,” he wrote. “In some situations, it may be easier and cheaper for a servicer to simply foreclose on a borrower than to try to fix the underlying problem.”

Service companies had high turnover and employees who saw their jobs as akin to that of collection agents. Some were known to hang up on callers if they started to get tough questions, Madigan wrote. He urged mortgage service companies to hire far more staff and boost training….

By this year, more federal and private efforts were under way to modify millions of troubled mortgages, and customer service was beginning to improve. Companies, though, were still having trouble getting the job done.

“It is difficult for homeowners to initiate productive discussions with lenders because many servicers lack the capacity to deal with a large volume of modifications,” the Congressional Oversight Panel reported. “Servicers are generally understaffed for handling a large volume of consumer loan workouts.”

The panel found that it’s “unlikely” that mortgage servicers will be able to do all they’re being asked to do: “Servicers are simply in the wrong line of business for doing modifications en masse,” it said.